With the market seeming to weaken, the Apr. 6 guest was William Wolman, chief economist of Business Week (and regular commentator on CNBC) to answer questions about the market and your investments.
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OnlineHost: Welcome to Business Week Online! With the stock market losing ground, is it time to sell stocks? Is the bull market over? Here to answer all your investment questions is William Wolman, chief economist of BW and a regular commentator on CNBC. The moderator is Jack Dierdorff (JackBW) of BW Online. And now on to your questions about the stock market -- and your investments.
JackBW: Good evening to all of you on AOL. Welcome back to BW Online, Bill Wolman.
BillWolman: Hi, Jack.
JackBW: Thanks for spending your Sunday evening with us.
BillWolman: Hi, everyone. Glad to be here in balmy New York.
JackBW: Here's a question to get us going.
Question: When you were with us on Dec. 22 talking about the investment outlook for 1997, you said there would be no major correction in the stock market this year. What happened? Or are we not in a major correction?
BillWolman: As I remember it, I thought I said that my best guess was that the broad averages like the Dow Jones industrials and the S&P 500 would be up about 10% in 1997. I also said that I'd be somewhat worried if the market came blasting out of the gate at the start of the year. Well, the market did blast out, and my worries have been at least somewhat justified. Since we had what is essentially a flat first quarter, my best guess is still that the market will end the year up about 10%. However, we clearly have a case of indigestion right now. Which is not gonna go away -- at least, not real soon.
JackBW: Since we headlined this event as "Time to Sell Stocks?", this question from CWood13094 is appropriate.
Question: Should we ride this out or sell?
BillWolman: It's extraordinarily difficult to time the market. However, unless I were very young or involved in a program like a 401(k) that automatically puts in the same amount of money each month, I would hesitate to commit new funds at this point. I will say that foreign markets look a little safer than the U.S. market right now, if you get the urge to invest.
JackBW: MTaler in San Francisco asks the next one, aimed partly at your friend Mr. Greenspan.
Question: Did the Fed's preemptive rate hike precipitate the busting of the speculative bubble in the stock market, and how widespread is this bust?
BillWolman: It seems to me that the Fed's rate hike is a factor in the market. But there's another factor that has been overlooked -- by most market commentators, anyway, although it is clear enough for them to recognize. That second factor is, of course, the decline in high-tech stocks that now dates back to January. We at BW believe that a slowdown in the rate of growth of incoming business will limit the gains that can be made in the high-tech sector this year. You have to have an active imagination or be a true slave of Greenspan not to realize that the decline in high-tech stocks, which has been the most important factor in the market in the first quarter, has little or nothing to do with the rise in interest rates.
JackBW: Still on interest rates, try this from AHTUMBLER.
Question: Do you feel that we will see another interest-rate hike in the spring? If so, do you see this as a flat year for the stock market at best?
BillWolman: My best guess is that the Fed will make a mistake and raise rates once again in the spring, as they continue to fight phantom inflation. That is why I say that if there's any graceful way of doing it, you should avoid committing new monies to the market over the next couple of months.
JackBW: Take this question from RWaldock.
Question: If you had about $100,000 of new money, would you put it in now or wait a few months?
BillWolman: I might think about gradually putting my money into a good-performing international equities fund -- say, about 10% of it, maybe 20%, if you're still a fuzzy-cheeked youth. I would keep the rest in extremely short-term securities. If your company has a GIC in its 401(k) plan, that would be a good place to keep your reserves.
JackBW: VHelming wants some industry investment advice.
Question: At a such a jumpy time in the market, is there a particular industry you would suggest over others?
BillWolman: Good question. It's fashionable on Wall Street, among the pros, to recommend oil companies and retailers at this point. Notice, however, that there is no reason for blind faith in the opinions of the pros. It's interesting, in this connection, that few mutual funds beat the market in the first quarter. That is not any recommendation for people whom you are paying management fees to run your money. Still, there is no doubt that oils and retailers are what they're recommending.
JackBW: TSwyers10 has the next one -- and it reminds me that last time you were here, you saw deflation as a bigger global threat than inflation.
Question: Bill, are U.S. workers receiving a pay raise in the form of increasing wages because of the corresponding increase in productivity, and is this a reason why there has been little sign of inflation in the economy?
BillWolman: There has been some slight increase in the rate of wage gains in the past couple of months, though it has been accompanied by a slowdown in the rate of growth of benefits. So total compensation is probably up slightly at best. That is one reason why inflation has stayed tame. Please notice that the Fed is fighting like mad to keep wages from rising. It is the concern about higher wages that was cited by the Fed in justifying the last rate hike. It's interesting to notice, I can't resist saying, that the Fed did not regard a sharp rise in profits, particularly bank profits, as a cause for tightening money.
JackBW: CWood13094 has a variation on the what-to-do-now question -- perhaps particularly as it applies to people who are now fully invested and are not ordinarily traders.
Question: What is your short-term portfolio strategy?
BillWolman: I've already suggested my answer: I would stay relatively liquid for the next couple of months. You should understand my reason: The Fed is fighting inflation at a time when there are definite signs that the rate of growth in the high-tech sector is waning. Mike Mandel, my colleague, did a BW Online conference on AOL on this a couple of weeks ago. Either take a look at the transcript [Mar. 23, 1997] or read his Cover Story on the New Business Cycle [Mar. 31 issue] for a fuller explanation. But I do believe that the Fed is playing a dangerous game by ignoring what is going on in high tech and focusing on the more traditional industries.
JackBW: BlueSkyFlr is a CNBC fan of yours, and this question follows from what you've been saying.
Question: Bill, you mentioned last week on CNBC that the usual surge in PC orders during the end of the quarter did not materialize in March. Could you expand on that statement to tell us if you think first-quarter earnings will be hurt by that?
BillWolman: Well, I can't expand on it beyond saying that the statement is based on reporting by some of my colleagues at BW for whose reporting skills I have great respect. I'm not saying that growth has stopped in high tech -- only that it seems to have slowed.
JackBW: LiMaNikll has a follow-up for you.
Question: Can you possibly see the Fed raising the discount rate again after seeing what the first one did to the market?
BillWolman: Let me finish on first-quarter earnings, first. A lot of high-tech companies have issued warnings about a slowdown in earnings growth. The heavyweights haven't chimed in yet. But toward the end of last week, earnings estimates for IBM were cut by two major brokerage houses, including Merrill Lynch. I don't take analysts seriously when they're bulling a stock, but when they issue this kind of warning, you have to pay attention. Let me finish by saying that neither I nor any of my colleages at BW feel that we can say anything definitive about earnings in the high-tech sector, but we do have a sense of unease.
Re: the discount-rate question, markets do not move in straight lines. And a rally is certainly possible over the next couple of weeks. But if the market makes new lows between now and the next Fed meeting, in May, the new lows will inhibit the Fed from raising rates.
JackBW: LeeeeeeB asks the next question.
Question: Bill, how much of the DJ drop is due to the Fed's moving rates up to keep foreign investors happy during Treasury funding? Don't we have a lot of foreign investors who may be looking for higher returns?
BillWolman: That's an interesting question. There's no doubt that the huge holdings of U.S. dollar-denominated assets by foreigners and the continuing massive U.S. trade deficit are behind the fact that U.S. rates are higher than those in the other industrial countries. But there is room for U.S. rates to go lower -- just taking this argument alone, i.e., that rates are so much higher here than in other industrial countries.
JackBW: Back to tech stocks but a different question, from Shopper19.
Question: Speaking of tech stocks, for those of us who purchased something like Intel on the high side, should we be worried? Time to sell?
BillWolman: BW editors cannot comment on specific stocks. However, for what it's worth, I have reflected my concern on the possible slowdown in incoming business in the technology sector. I would reread Mike Mandel's story and form my own judgment, if I were you. :)
JackBW: NOHJR moves us to the bond market.
Question: Do you feel that additional Fed rate hikes have been built into the bond market? If not, how high can yields go?
BillWolman: Yes, additional rate hikes are somewhat built into the bond market. The problem is that even though that's the case, the bond market tends to go down anyway. A lot of people were predicting that the last rate hike would, in fact, strengthen the demand for long-term bonds rather than weaken it. But it didn't happen that way, and seldom does, even though that kind of judgment -- that Fed rate hikes are good for long-term bonds -- is part of the conventional wisdom of the bond market vigilantes. You've got to remember that everyone has a vested interest, and a vested interest of bond dealers causes them to make the kind of statements they do. There is no more real reason to believe that bond dealers make disinterested judgments any more than there is a reason to believe in the disinterest of anybody who's trying to sell anything.
JackBW: Ragz2 in Macon, Ga., is also curious about the Fed's reasoning.
Question: How can the Fed justify raising rates with inflation so low?
(Thanks, Bill -- love ya on CNBC.)
BillWolman: Thank you! As you well know, if you see me on CNBC, I believe that the Fed made a mistake when it raised rates. As you also should know, that is not the judgment of most economists, including some of my colleagues at BW.
JackBW: ABelfus in Bucks County, Pa., goes back to the bond market.
Question: Bill, is this a good time to buy bonds, especially long-term muni bonds?
BillWolman: My answer to that question is yes, since I believe that long rates will be considerably lower by the end of this year than they are now. I should also warn you that I did not directly predict the most recent rise in rates. However, as far as I'm concerned, the rise in rates in the past six weeks makes it more likely than ever that they'll decline in the second half, since I believe that the higher rates will slow the economy.
JackBW: MChand9802 wonders about your thoughts on global deflation, Bill.
Question: Do you believe the disinflationary global environment is in place for some time to come?
BillWolman: That's a good question. And my answer is yes. There is so much competition in the world, and central bankers around the world vie with each other for who is going to be the toughest in fighting inflation. So the global environment will certainly stay disinflationary, at least in my judgment. That is one of the basic facts of economic life in the late '90s, as I see things.
JackBW: EBELFUS has a really long-term investment question for you, Bill.
Question: Grandchild four years old -- where's the best place to invest for her future?
BillWolman: About that there is no doubt. Over very long time periods, investments in common stocks beat everything else, and by a very wide margin. I believe that emerging markets will outperform the industrial countries over the foreseeable future, so put some of that money into a really well-managed emerging-market fund, and your grandchild will be able to pick any college she wants.
JackBW: After all, the market is only one facet of the economy -- so, from TSwyers10, take this.
Question: Do you see a slowing of the economy by the second half of this year?
BillWolman: The answer is yes. I have already said so, because I believe interest rates have gone high enough to slow things, and I have concerns about the volume of incoming business in high tech.
JackBW: Stktrader is here now.
Question: You mentioned on CNBC that you believed that the rate rise was uncalled for. Is that still your view?
BillWolman: Yes. A thousand times yes. :) I believe that the Fed based its decision to raise rates on what has occurred in the traditional sectors of the economy, ignoring what was happening in high tech. According to work that my BW colleagues have done, it was a slowdown in incoming business in high tech that contributed materially to the 1990-91 recession, and high tech was a much smaller part of the economy then than it is now.
JackBW: YellowSt in Michigan asks the next question. How about it?
Question: Bill, Alan Greenspan specifically pooh-poohed the idea of a new business cycle in his Humphrey-Hawkins testimony -- I thought he was taking aim at you! He doesn't buy it -- he's still fighting 1970s-style inflation. What do you think?
BillWolman: My answer is I hope he was [taking aim at me]. I would consider it highly flattering. However, I don't really believe that he was, since I like to think that I do not have any delusions of adequacy. That having been said, I think he should pay attention to the new business cycle, as Business Week called it, and he is making a giant mistake by not doing so. By the way, Alan Greenspan got married yesterday. And despite everything, we should all wish him well! :)
JackBW: LeeeeeeB is back with this one for you, Bill Wolman of Business Week.
Question: Bill, do you think it is healthy that many radically short moves up or down come because of a month-to-month economic data release rather than a look at the longer-term trends?
BillWolman: That's a good question. But you have to remember that there are senses in which the market is a game, and these overreactions in the short run create many opportunities for smart traders. I'm not one of them, but if you find someone who knows how to do this, they can teach you a lot about making money.
JackBW: DS236 takes us to a new segment of the market for tonight so far.
Question: What do you think of futures? Shaky or not?
BillWolman: The answer is, it takes a tremendous amount of guts to take naked positions in futures. However, the use of futures in trading can be both lucrative and shrewd. It also should be pointed out that futures can be used as a hedge vs. losses that would not otherwise be available. So don't pooh-pooh the futures market. It offers tremendous opportunities. Find a book or a person who can teach you how to use them to your great advantage.
JackBW: Impudent has the next question for Bill Wolman on investments and the market.
Question: Do you think that the pattern of stock market activities is similar or indicative of a situation such as the Great Depression, or do you think that it could signal an upcoming recession?
BillWolman: Good question -- it's the $64 billion question. There are some similarities between what has happened the past two years and what happened in 1927-28. But I really don't believe we're on the verge of either a huge market crash or a depression. However, if the market can't rally here, I do think that I have to take its behavior as a signal of a substantial slowdown.
JackBW: EBELFUS wonders about a political factor in the Fed equation.
Question: How much of a role do politics play in the Fed's moves?
BillWolman: I don't think very much. However, there are those who believe that the Fed, and indeed Washington in general, including incumbent politicians, like to take the risk of economic slowdown in the year after elections to create enough slack in the economy so they can pump it up again when the next election comes around. There is evidence that the government takes measures to increase the rate of growth of disposable income in the spring and summer of election years. There is also some evidence that at specific points in history, the Fed has acted to bolster the re-election chances of the incumbent party. For example, the case that Arthur F. Burns acted so as to bolster the re-election of Richard Nixon in 1972 is very strong.
JackBW: Next question -- based on a previous answer.
Question: Bill, you just said "if the market can't rally here." Is there a substantial chance it can't?
BillWolman: The answer is obviously yes. However, it depends on what you mean by a rally. The market can retrace 50% of the decline from its high without the rise constituting a serious rally -- at least according to most technicians that I speak to. So if the market goes up, say, in this coming week, I would not regard it as decisive evidence that our short-term troubles are behind us.
JackBW: MKlauke wonders about interest-rate hikes and world trade.
Question: What's the impact of the increase for the strength of the dollar? Won't this hurt the U.S. import-export position?
BillWolman: The answer is yes. It'll hurt -- and will act as a drag on the growth in real GDP.
JackBW: How are you at psychoanalyzing Alan Greenspan?
Question: Do you see Greenspan as an intuitive person when dealing with stocks, or does he interfere too much?
BillWolman: Any past psychoanalysis may not work, since as I pointed out, Greenspan was married today. However, Greenspan is fairly intuitive. And I do think that he was serious when he talked about "irrational exuberance" in early December. I'm sure he is pleased that the market has faded some, and I think he is convinced that that will prolong the recovery. So he's feeling pretty good about himself. And as I have said, barring a further decline in the market, I think he'll raise rates again in May, mistake though that may be.
JackBW: Here's a question I've heard elsewhere before tonight -- and a good one.
Question: Do you believe that stocks were overvalued, and the stock market is simply correcting itself?
BillWolman: The answer is that most stocks were not overvalued, at least not necessarily. As we showed in BW this week, by the way, most stocks were not selling at particularly high P/Es, especially small-cap stocks. The real problem, if there was one, was in the "nifty fifty." One could argue that some of those stocks -- perhaps most of them -- were selling at unsustainable P/Es.
JackBW: StephenFF1 has an inevitable question about -- well, here it is...
Question: Is it time to buy gold finally?
BillWolman: Let me tell a personal story. Back in 1981, my wife stood in line at the Republic National Bank of New York to sell the few Krugerrands that we owned at the time for more than $800. It was the best investment decision we ever made, and we do not look forward to buying those Krugerrands back, even though the price of gold is now under $400. Since I do not believe we're in an inflationary environment, I don't believe in gold at this moment -- or at any moment except in a hyper-inflationary environment. The only problem is, I never saw the money she got. :)
JackBW: That's it for tonight. Thanks to BW's chief economist, Bill Wolman, for his usual incisive comments on the markets and investments.
BillWolman: Thanks, Jack.
JackBW: Special thanks to the audience for the overflow of questions. Sorry we didn't have time to use many more.
BillWolman: Thanks also from me to the audience. My fingers are down to the bone!
JackBW: Transcripts of this and all BW Online conferences and chats are available soon after the event. Look under Talk & Conferences on the BW Online opening screen. Thanks again, and goodnight to all!
Copyright 1997 by The McGraw-Hill Companies, Inc. All rights reserved.
